Sunday, February 07, 2010

Greece debt crisis unfolds (source The Economic Times )

Source: The Economic Times
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http://economictimes.indiatimes.com/News/International-Business/Greece-debt-crisis-unfolds/articleshow/5529954.cms
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LONDON: The markets are in a funk about the public-debt crisis in Greece. The country was clearly not ready for euro membership and now faces.

some hard choices: make savage budget cuts and plunge into a deep recession; default on its debts and lose its credit rating for a generation; plead for a bailout from its European Union partners; or quit the euro.

But, hey, there might be money to be made from this Greek tragedy. The way to do it is by swapping Hungarian bonds for Greek ones, selling the euro, ditching Spanish and Portuguese assets, and shorting the Athens stock market. The Greek crisis is accelerating all the time.

Last week, Greek bonds plunged as the markets took a look at government plans to cut a budget deficit running at 12.7 per cent of gross domestic product. Traders decided the numbers didn't add up. There was speculation that a bailout was being organised by the European Central Bank, or the EU.

Greece's troubles seeped into the currency markets, dragging down the euro. Other euroarea bond markets, in Spain and Portugal in particular, took a tumble. One wild story had Greece selling bonds to China to ease the budget crisis. The markets are demanding answers, and in the next few weeks they may get them. Greece is in the spotlight, and it will have to come up with a credible plan.

The trouble is none of the options is very appealing. If the country gets serious about curbing its deficit, most of the growth of the last decade will turn out to have been illusory. If Greece begs its euro-area partners for a bailout, it will be humiliated. If it starts printing some "new drachma" to pay back bondholders, it will be almost impossible to borrow more.

Greece will do what most of us would when faced with such a terrible range of choices: prevaricate, delay, postpone and hope something turns up.

Until the crisis is resolved, though, there will be plenty of opportunities to make money. Here are five places to start:

One: Buy every Greek bond you can lay your hands on. Greek 10-year bonds yield 6.6 percent, compared with 3.2 percent for German debt. That is a huge difference for what is essentially the same product: a government bond denominated in euros. So long as default is avoided, and Greece stays in the euro area, your Greek bonds will soar in price.

Two: Sell Hungarian and Polish government bonds. Both countries are in respectable shape economically, even if they have been hit hard by the global recession. Both aim to join the euro area at some point in the coming decade, at which point interest rates would fall in line with the ECB benchmark, and bond prices would soar. But after Greece's woes, do you think Poland and Hungary will be allowed into the euro area anytime soon?
Not likely. Short those bond markets as soon as you can.

Three: Sell the euro. Every day, EU and ECB officials line up to declare that the Greeks won't get any help. Officially, that might be true. There are plenty of ways to help out on the sly. Greece could be allowed to issue bonds jointly with other countries; the ECB could extend measures that allow it to accept Greek bonds as collateral for loans; or the EU could find a way of increasing "structural" subsidies for the Greek government.

The markets will smell a bailout, however, even if it comes packaged in some fancy label. The credibility of the euro and the ECB will be badly damaged. Investors will ditch the currency, and switch back to the dollar and the yen.

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Thursday, February 04, 2010

Serving time for a crime I did not commit

Jan 2010 ... 12 bulls and 13 bear market days. Where are the green shoots and signs of recovery ?

Last November, I recall joking with my friends that the worst is yet to come. Maybe a few of the asset classes and industries might start looking better in the near future , but banks are going to have a rough time ahead. . I wouldn't be surprised if we find cities and countries going bankrupt. With the high percentage of gearing and leverage applied by banks in the business transactions we find that the risks and losses are multiplied by factors of 10 to 100 if not more. Are financial rescues like the TARP and bailouts enough to save the economy? Greed in the industry would just result in all the aid and bailout money being swallowed as quickly as they are being loaned out - creating even more debt.

The few trillion dollars bailed out was meant to write off bad assets. But then have banks written off these assets? Are they no longer bad assets? If so, could someone explain how this has been achieved?

Banks still have these assets on their books. Suspension of the traditional mark to market method of accounting for the rotten assets has only resulted in a profits for banks - but on a completely baseless accounting practice.

The global economies remain very fragile with very bleak prospects for the heavily indebted economies of the US and UK. Sovereign debt crisis in economies with large and rising deficits are inevitable - and we have just started seeing examples of these in the last 2 months - and UK is in the list of such examples - its just the timing that is not clear.

Whatever measures are being taken to rescue the world economy seems too little too late and also very unsustainable.

What can be said about the banking industry is that it is a regulated oligopoly with very restricted competition. The current hue and cry of bonuses and pay scales is just a joke. Banks are free from market disciplines which apply to "genuinely" competitive industries and can therefore chose to do as they wish and pay their staff what they like. The cost is always borne by the customers and if not by the tax payers.

This makes me believe I am serving time for a crime I did not commit. I love the challenges and pressure involved in my line of work, but I am tad bit uncomfortable with the moral ethics and values of this industry. But perhaps, being a part of the system is crime enough. My fervent passion to work in the financial services industry has taken me through a roller coaster ride the last 2 years. Its had more downs than ups, but I am still here - with optimism and a fair bit of courage to see this through.

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